Drug supplies cut to Greece as capital controls return to Europe

Don’t be surprised if your finance team starts working even longer hours over the next few weeks. Not only will they have to worry about revising profit forecasts and working capital issues, as demand weakens in some core markets. Now they have to worry about what might happen to the cash actually in some company bank accounts.

The 2 euro coins above illustrate the problem. The one on the left was issued by Cyprus and features the idol of Pomos – a sculpture from the pre-historic period. The one on the right was issued by Germany and features the German eagle – the symbol of German sovereignty. In theory, and until last week, both are the same.

However, the eurozone’s bungled rescue of Cyprus’ banks last week has led to capital controls being introduced on the island. These are meant to be temporary, whilst things ‘normalise’. But ‘temporary’ can mean different things to different people. The UK, for example, introduced “temporary capital controls” as World War 2 began in 1939. They were only abolished in 1979.

Since last Thursday, when banks in Cyprus reopened, people can only withdraw €300/day ($385) from their accounts. Transfers over €5000 need central bank permission. Credit card transactions are restricted to €5000/month outside Cyprus, and travellers can only take €3000 in banknotes out of the country per trip.

Outside Cyprus, some South European governments have not paid pharma and other bills for up to 3 years. Swiss television reports that pharma industry debts have risen to €12bn $15bn) over the past 3 years. Now, as the events of the past week demonstrate, we are moving to the next stage – where governments impose capital controls to stop money leaving the country.

This is serious stuff, and will not just be confined to Cyprus. Greece will surely be next in line. And if Greece, why not Portugal, or Ireland or even the 2 bigger countries in the PIIGS – Italy and Spain? As The Guardian reports, supplies of imported drugs to Greek pharmacies are now down an astonishing 90% as companies give up hope of ever being paid for their product.

Every CFO will probably have this key statement from the president of the Eurozone already pinned to their office wall. Discussing the Cyprus bail-in, he warned:

“It will force all financial institutions, as well as investors, to think about the risks they are taking on because they will now have to realise that it may also hurt them. The risks might come towards them.”

Faced with this clear warning, no finance director will want to risk waking up one Monday morning to find their account has been blocked by new ‘temporary capital controls’? And business managers also need to think about what happens next. Trade barriers will be the next to return as the Cycle of Deflation continues to unfold.